Posts Tagged ‘Annuities’

Buried deep in this year’s dull Budget was a secret £6.5bn tax raid on pensioners and savers under the guise of radical reforms.

George Osborne’s most significant policy announcement was the proposal to allow pensioners already drawing an annuity to sell their policy in exchange for a lump sum.

It is the second stage in major pensions reform announced in last year’s Budget to allow all over-55s to access their pension pots.

The first stage of pension freedoms is relatively simple. The pension system saw savers build up a retirement pot of cash with generous tax relief on contributions. In exchange they had to buy a secure income or annuity (or face a punitive 55% tax if they withdrew their cash from the pension wrapper).

Annuities work as a reverse insurance product so you pay over a big chuck of cash to the insurer and in return they pay you money every month until you die. Insurers pool the risk so those who die earlier fund the payments for those who live longer than expected lives.

As people live longer insurers are paying a lower amount each month over a longer period, making pensioners buying them poorer. Successive Governments have taken steps to ease the requirement to buy an annuity by allowing wealthier investors to drawdown their own money.

But Osborne’s announcement last year, coming into force on 6 April, is the big bang. It means anyone can withdraw their pension pot at marginal income tax rates (although everyone receives an initial tax-free lump sum of 25%).

The Treasury estimates the behavioural changes will see individuals wanting the money today despite the tax penalties. It will lead to many savers paying income tax on withdrawals they have never paid before.